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March 17, 2010

The Wirehouse Model: Far From Dead

Although the wirehouse firms are far from perfect, let's not forget that they have been tremendous sources of innovation and leadership and should continue to play such a role in the future.

"Remember that no one ever kicks a dead dog." -- Dale Carnegie

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It has become popular to discuss the death of the retail brokerage model. The market turmoil wiped out many franchises or prompted many wirehouse advisors to retire early. Some moved to regional dealers or independent channels. Still others are finding that unless they meet a certain bogey, they are no longer welcome.

And so the mighty powerhouses appear to have become the incredible shrinking hulks.

Cerulli Research estimates that assets in the wirehouse community will shrink from 48% of individuals investor's assets under management as of 2008 to 41% by 2012 - a substantial drop in market share over several years. Meanwhile, the Boston research group estimates that independents will snag 23% of assets, up from 19%.

But the wirehouse model is far from dead - even if critics say it is broken and claim its advisors are nothing but retro product pushers. Wirehouses are far from perfect but no one should forget that they have been sources of innovation and leadership and despite all that has transpired still have the resources to retain that position.

If I were a wirehouse executive, I would view these first-draft obituaries as backhanded compliments born largely of jealousy.

In his book How to Stop Worrying and Start Living, Dale Carnegie tells the story of cadets who regularly kicked their classmate, the Prince of Wales and future Kind Edward VIII. When confronted, the teenagers confessed that later in life "They wanted to be able to say that they had kicked the King!"

I would assert that the wirehouses are likely to remain the leaders of the pack if they keep an eye on innovation and carefully manage broker talent. As an executive recruiter to the industry for more than 25 years, I offer this short list of advice:

1. Focus on the aspects of the wirehouse model that work: scalable offerings for a wide range of clients

Unlike their competitors, wirehouses offer unusually extensive platforms as well as turnkey solutions under recognizable name brands. Merrill Lynch, even if owned by a commercial bank, carries serious cachet and weight for retail investors. Generations of advisors have utilized the wirehouse platform to build successful, high-end franchises.

Wirehouses cater to an astounding number of large accounts. For example, they dominate the Separately Managed Account (SMA) industry - holding an estimated 79% of assets, according to Cerulli. Wirehouse advisor teams with $200 million or more in assets control a disproportionate amount of those assets.

2. Reinstate what was once the unparalleled support system

Before the Great Recession, wirehouses provided the deepest and broadest array of resources to advisors and their clients. Over the past couple of years, the firms have been forced to slash and burn overhead. Layoffs have cut deep into many aspects of support, including product specialists, field wholesalers, due diligence analysts, and trainers for advisor teams. Those services were key to retaining advisors.

Regionals have negligible turnover because their advisors have ready access to home office people; advisors feel connected and in charge of their destinies. This is no longer as true for wirehouses and is a serious Achilles heel.

3. Bolster the unique and innovative platforms and play up the specialty services

It's easy to forget, but many of today's "must have" products were hatched at the big brokerages. Merrill Lynch, Smith Barney - they were leaders in areas like money market accounts and fee-based business. Others embellished.

The larger firms also have the depth to provide services that high net worth investors crave: Libor-based lending; swaps, and derivatives (which, despite their bad rep, still have a role to play in finance). By comparison, smaller competitors have less depth in this area and therefore fewer higher net worth advisors flock to regional and independent broker dealers.

Also, home office managed portfolio products that perform well, including ETFs and unified managed accounts, can be a powerful reason to stay.

4. Reinforce the brand

Advertising remains an important component for attracting clients. Advisors are attracted to firms whose reputation will help them build their practices.

To attract younger investors, it may be time to work out all the legal and regulatory issues with reaching out to Web 2.0 and the social media that have rolled over the traditional media that wirehouses used to advertise services.

5. Don't be afraid to roll out the big guns

Keep paying big deals. Most of those grousing that bigger recruiting packages are "uneconomical" come from firms that can't compete. Advisors with big retention packages of 75% or more - typical for producers with $1 million or more in annual commissions -- are most likely to go only to another wirehouse if they ever leave at all.

6. Revamp deferred comp programs; focus on more mentoring

Over the past decades, firms ramped up stock-based deferred comp programs. Those expensive programs backfired in 2008-09 -- when firms most wanted to retain talent. Advisors became instant free agents after the stock market plunge: The golden handcuffs that once tethered them to their firms suddenly turned to dross and we witnessed the most impressive round of job changing in memory.

But if the firms had kept more of the deferred comp in cash, then the advisors might not have walked so freely.

Another route to retention is creating mentoring programs: Help the successful teams grow by bringing in fresh talent that can be trained and integrated into a well functioning unit. And now more than ever, firms can recruit mature people seeking to launch new careers in the wake of the massive job losses of the past few years.

Second, career people often have greater maturity and great contacts and the presence to mine those relationships; it's the silver lining of the Great Recession.